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Credit Cards

What are they?

Credit cards allow you to spend money today and pay it back at a later date. They're equivalent to a very convenient and flexible loan that can last between several days and many years.

You normally have an interest-free ('grace') period of up to 56 days between when you spend on the card and when payment is due following your next statement, although cash withdrawals may attract interest immediately and purchases might too if you have an unpaid balance from the previous month. If you can't afford (or don't want to) to pay off the full balance, you'll at least have to repay a 'minimum payment' each month.

Interest rates vary widely but are generally high, making credit cards a poor choice for long term borrowing.

Credit cards should not be confused with 'charge' cards, where the balance must be paid off in full each month, and 'debit' cards which take money directly from your bank account (similar to a cheque).

What types are there?

Credit cards come in several flavours. Choosing the right type could not only save you money but could earn you extra perks too.

StandardIntroductory Low InterestCashbackRewardCharityStore Cards

These are cards without any bells and whistles. You usually enjoy an interest free period on purchases until your next 'payment due' date, at which point you'll have to repay a 'minimum amount' at the very least. Interest will then be charged on any remaining balance.


When choosing a card, you should be aware of the following features.

Credit LimitGrace PeriodPurchase ProtectionATMsFraud ProtectionGold/Platinum

This is simply a limit on how much you can borrow. While a high limit might seem attractive, it means you'll be stung with loads of interest if you spend lots and can't afford to pay off your balance.

What costs can I expect?

Ignore credit card costs and charges at your peril. Understanding how and when you might be charged could help you save a fortune in unnecessary interest and fees.

InterestAbroadAnnualLate PaymentBalance TransferRetailer

Interest is your worst enemy if you don't pay off your bill in full each month. It'll be charged on the balance thereafter and, on many cards, immediately on purchases too.

Rates vary widely, from 0% on some introductory deals to over 40% APR on the worst store cards.

Beware the minimum monthly payment!

When you receive your credit card statement every month you'll see a 'minimum payment' amount, usually the greater of around 2% - 4% of your balance or £5 - £25. This is the bare minimum you can pay without incurring a penalty charge, not what you should pay.

Paying just the minimum amount could mean the majority of your debt getting clobbered with yet more interest, creating a vicious circle. Of course, credit card companies love this (as long as you pay off the balance eventually) because it makes them a fortune - but you should try and avoid falling into this trap if at all possible.

Candid Example Ms Clueless has a £3,000 outstanding balance on her credit card with at an interest rate of 18.9% and a minimum monthly payment of 3% (of the balance) or £5, whichever is greater.
By paying just the minimum amount each month, it would take her 19 years to clear the debt. If she instead pays £100 each month the debt would be cleared in around 3.5 years.

Prepaid Cards

Prepaid cards are like credit cards without the credit. They're plastic cards, usually Visa or MasterCard that you load up with cash then use to pay for items as you normally would with a credit or debit card. They're useful for those who may have problems getting a credit or debit card and anyone wanting to avoid building up debts - prepaid cards only let you spend what you have.

Prepaid cards can also be useful for parents wanting to give their offspring the convenience of a credit card while limiting expenditure, as some cards are available for children aged 13 and over.

You can usually load between £10 - £3,000+ onto a card, but beware that any balance is not covered by the Financial Services Compensation Scheme should the provider goes bankrupt, so only load modest amounts if concerned by this. Another potential downside is purchases not being protected as they would be with a credit card.

Prepaid cards will normally charge when you top up with cash and/or spend on the card, but other charges may apply too. Always check charges very carefully before applying to ensure you're not paying too much as there's a lot of very expensive cards out there. Charges to look out for include:

ApplicationTop UpTransactionMonthly/RenewalInactivityATMForeign

Most cards charge an application fee of around £10, basically an upfront charge. When applying it's worth checking whether the provider offers cashback via websites such as Quidco and Topcashback so you can claw back some of this fee.

Note, you might also be charged a similar amount if you wish to cancel the card in future.

If you lose a prepaid card you should notify the provider immediately so they can block the card. Failing to do so could risk you losing any balance left on the card if someone else is using it fraudulently.

Payment Protection Plans

As with most types of borrowing, credit card companies will invariably try and sell you payment protection insurance. This is designed to pay your minimum monthly payments (or a fixed amount) if you have an accident, get sick or lose your job.

However, these policies are usually poor value and, for some, bordering on pointless. If you make a successful claim the payouts typically only last for 12 months. The cover is also very expensive, with most card providers charging 79p per £100 of outstanding balance each month. This means cover for an outstanding balance of £1,000 could cost you around £95 a year.

If you really want this type of insurance, don't buy from your card provider. You'll almost certainly get a better deal elsewhere by shopping around independent PPI providers.

Credit Card Payment Protection Insurance (PPI)
Monthly rate per £100 outstanding balance Estimated annual cost on a £3,000 balance
Typical Credit Card Provider Rates 79p per month £284
A Better Deal 50p per month £180


Here's some of the more common credit card jargon you might come across:

Affinity CardA credit card that donates to a charity/football club etc when you spend money. A good deal for the charity, but usually a bad deal for the customer.
Balance TransferWhen you transfer an outstanding balance from one credit card to another, perhaps to benefit from a lower rate.
Card IssuerThe bank, building society or store whose name is on your card.
Cashback CardCredit cards that give you a percentage of the money you spend (e.g. 1%) as a cashback.
Chip & PinCredit card security system that replaced signatures. Combines a small electronic chip built into the credit card with a four digit number entry at the point of purchase.
Credit LimitThe maximum amount you may owe through spending on the card. Exceeding this could incur charges and the card being suspended.
Interest-Free PeriodThe time between when you buy something on the card and the date when you must pay your monthly bill. Can be up to 56 days.
Minimum Payment The minimum amount you must pay each month to avoid charges in addition to interest.
Rewards CardCredit cards that give you some sort of reward (e.g. air miles) when you spend money.